FINANCIAL MANAGEMENT OF MSWM

Every region that seeks a sustainable MSWM system should not only cover aspects such as cleanliness, public health standards and environmental quality preservation but also financing sources should be clearly developed (Shekdar, 2009). Thus, the system must adequately balance revenues with capital investment needs and operational costs in order to achieve sustainability (Rodríguez, 2002). However, the academic literature highlights that financial management is a complex task and a major challenge for MSWM systems (Karam et al., 1990; Koushki et al., 2004; Mrayyan & Hamdi, 2006; Shekdar, 2009).

As explained above, the MSWM system of Mallorca divides treatments according to two sources: sorted (recycled and organic waste) and non-sorted MSW. The use of treatment facilities for sorted MSW involves a significant increase in costs as long as the classification

36 For a deeper view of the environmental controls of MSW treatment, see APPENDIX Nº 3.5.

79 of sorted waste in the collection system is more specific (Rodríguez, 2002; Tınmaz & Demir, 2006). On the other hand, an energy recovery technology for non-sorted (mixed) MSW treatment requires not only large capital investment (Rodríguez, 2002) but also a supply of materials with high calorific value such as paper and cardboard to raise combustion levels (Murray, 1999). Thus, the financial sustainability of the system in Mallorca imposes a challenge for public authorities to structure the appropriate economic incentives since both systems, to some extent, compete for resources (higher recycling rates imply lower volumes for energy recovery).

Another characteristic of Mallorca’s MSWM system is the presence of a public–private partnership in treatment provision. As some authors have argued, the involvement of the private sector in treatment provision has helped to highlight the huge costs involved in MSWM given that under public provision they are often under-priced or non-priced (Bartone, 1990; Rodriguez, 2002; Jin et al., 2006b). As a dynamic system with a high fixed capital structure, MSWM with private provision requires long-term contracts that guarantee the financial sustainability of the system (Connett & Connett, 1994). In Mallorca, the contract with TIRME seeks to update the fee in order to maintain the economic and financial balance of processing operations.

80 FIGURE Nº 3.3

REVENUES FROM WASTE TREATMENT IN MALLORCA - TIRME

Source: Own elaboration based on TIRME information.

As Figure Nº 3.3 shows, the MSWM system in Mallorca is funded by two main sources:

revenues generated by treatment facilities (derived from sorted material) and the incineration fee. The first source includes the revenues generated by sales to ECOVIDRIO and ECOEMBES, energy production from organic material and compost sales. The second source of revenue is the fee that was established in the contract with TIRME. According to this contract, all revenues derived from the first source (recovered materials) should be used to reduce the final fee that TIRME finally charges municipalities (incineration fee), which will obtain those resources by means of taxes or tariffs to residents and businesses. The evolution of this fee is shown in Figure Nº 3.4.

MSWM SYSTEM REVENUES

SORTED MSW

NON-SORTED MSW

RECYCLED MATERIAL SALES

COMPOST SALES

ENERGY SALES (FROM BIOGAS)

INCINERATION FEE (TO MUNICIPALITIES)

81 FIGURE Nº 3.4

EVOLUTION OF THE INCINERATION FEE – TIRME (IN CONSTANT EUROS OF 2002 / TONS)

Source: Own elaboration based on TIRME information

Taking into account that MSWM involves more activities than just treatment, the economic analysis of public policy should also consider setting accurate financial incentives to reduce MSW generation and collection costs. If we adopt the polluter pays principle (PPP) as a guide for the MSWM system³⁷, then tariffs should be set according to the responsibility for cleaning it up (Chung & Lo, 2008; Narayana, 2009). As we can appreciate, the system shows a series of problems that should be considered challenges to the PPP in MSWM.

First, the incineration fee charged to municipalities is linked to the amount of MSW that goes to energy recovery facilities (non-sorted waste); thus, the cost of sorted treatment is included in the charges of non-sorted waste. This means an implicit subsidy on sorted MSW treatment in Mallorca. The crossed subsidy seeks to promote recycling and sorting (by providing a zero fee to municipalities). However, the main problem is the lack of information regarding the real cost of recycling and recovery to Mallorca and this leads to the erroneous idea that

37 As the European Commission and Spanish Law establishes.

0.00 20.00 40.00 60.00 80.00 100.00 120.00

2002 2003 2004 2005 2006 2007 2008 2009 2010

82 sorting waste incurs no cost to society. Furthermore, the cross-subsidy generates a distortion in the financial structure since charges are not made according to the real cost of treatment³⁸. Second, waste minimization responsibility nowadays relies on public authorities in Mallorca (municipalities). For this reason, the analysis of the fees that are finally paid by generators is important. The system established in Mallorca apparently seeks to apply the PPP by using a fee system charged according to the amount of non-sorted MSW generated by each municipality. However, for the PPP to be effectively implemented, it is important that the economic incentive could be transmitted to the generator of MSW, which are not municipalities but rather residents and businesses. Municipalities in Mallorca mainly base their tariffs on fixed payments per year; therefore, few incentives for waste reduction have been established for residents and tourism businesses (see Figure Nº 3.5).

FIGURE Nº 3.5

MSWM TARIFF SYSTEM IN MALLORCA

38 The real cost of treatment varies according to the composition and volume of sorted waste. For details regarding financial treatment costs, see APPENDIX Nº 3.6.

TOURIST

83 The general rule of setting the tariff according to a fixed annual fee is broken for residents in some municipalities in Mallorca such as Andratx, Esporlas and Felanitx that use discounts on these fees to promote sorting and recycling³⁹. In the case of tourism businesses, it is possible to find many possible bases for the tariffs such as area or a fixed amount per year; however, in the case of hotels, the base of the calculation is usually linked to the number of beds⁴⁰.

Two main options are implemented to charge the fee to hotels. On the one hand there are fixed fees such as the ones used for residents and, on the other hand, there are variable fees according to the number of beds. In the latter, there are two main alternatives: (i) charging according to the quality of the hotel (stars) or (ii) charging according to the services provided (with or without a restaurant). Thus, none of these methodologies charges according to the direct measures of MSW generation. Therefore, they do not provide incentives for better MSWM implemented by generators.

Third, the MSWM system does not give enough incentives to public authorities (municipalities) to establish different schemes that could be closer to the PPP. These may incorporate incentives for waste minimization by generators since the existing ones are much easier and cheaper to manage than charging according to MSW generation. Some studies have followed the PPP in Korea⁴¹ (Lee & Sun Paik, 2011) and Taiwan⁴² (Li-The et al., 2006), which use volume-based collection fees related to certificated garbage bags. However, even though these bag-based systems increase the separation of recyclables, they are only applied to residents and, as far as the authors know, there are no experiences concerning a volume-based collection methodology in tourism destinations.

39 For detailed information regarding municipal fees to residents, see APPENDIX Nº 3.7.

40 For further details regarding municipal fees to hotels, see APPENDIX Nº 3.8.

41 The system was implemented in 1995 and it requires that every household must purchase certified plastic bags for mixed MSW disposal, while the disposal of separated recyclables is free of charge (cross-subsidization as in Mallorca).

42 The volume-based collection fee system in Taiwan began in 2000. This system forces waste collection fees to be paid by citizens by purchasing an authorized garbage bag for the disposal of general waste. It also established penalties for those who manufacture pirated waste bags and included possible prison sentences.

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